Slow organic growth puts M&A pressure on hospital chains

Increased merger-and-acquisition activity among for-profit hospitals is being driven in part by the kind of slower organic growth seen in the first round of second-quarter earnings announcements.

Admissions have been dampened as the number of newly insured has flattened nationally, and the number of new exchange patients and those insured under Medicaid expansion has topped out.

Hospital admissions have slowed to a "new normal" of 1% to 2% year-over-year growth, the earnings announcements indicate.

That has left hospital companies such as HCA, Universal Health Services and Community Health Systems struggling to sustain the revenue growth and earnings performance that their investors demand.

As announced in April, HCA is buying into a new hospital market for the first time since 2003. The $710 million deal to purchase 604-bed Memorial University Medical Center in Savannah, Ga., is one of eight hospital acquisition deals that HCA has made this year since April, a mini-binge for the nation's largest hospital chain.

Nashville-based HCA's reach into a new market for the first time in 14 years speaks to the need of HCA and other hospital companies to supplement slowing organic growth with select acquisitions, said Jefferies & Co. healthcare analyst Brian Tanquilut. If the deal for Memorial University is completed by year-end, it will make Savannah the 15th major market for 170-hospital HCA.

Admissions and emergency room growth at hospitals are at about half the rates seen when Obamacare was cranking the newly insured into the healthcare system, Tanquilut and other analysts note. The negative consequences of that slowdown are starting to show up in hospital and health insurers' earnings.

HCA posted flat net income in the second quarter on revenue of $10.7 billion and it lowered expectations for the rest of 2017.

UHS was in the same boat. The acute-care and behavioral hospital giant lowered its guidance for all of 2017 when its second-quarter earnings came in flat on slowing behavioral health volume.

CHS, the nation's second-largest investor-owned hospital chain, has been shedding lower-margin hospitals but not fast enough to return to the black in the second quarter. The Franklin, Tenn.-based company posted a net loss of $131 million as admissions at the 150 hospitals it has owned at least a year fell 2.5% in the quarter vs. the year-earlier period.

CHS is in the process of selling 30 hospitals and other assets to reduce $15 billion in debt and focus on its healthier markets.

Obamacare volumes also influenced the earnings of managed-care companies in the quarter.

UnitedHealth Group benefited from exiting nearly all of the 34 states where it sold Affordable Care Act exchange plans in 2016. The Minnetonka, Minn.-based insurer's revenue grew 7.7% year over year to $50.1 billion, while profit surged 33.5% to $2.4 billion as the company pulled in more revenue from its Medicare segment. Still, the insurer said it lost out on $1.8 billion in revenue largely because of its exchange pullback and a pause in a health insurance tax.

But Centene Corp.'s results were buoyed by its growing exchange footprint. The St. Louis-based insurer's experience managing low-income Medicaid members has given it a leg up over competitors in the ACA marketplace, where enrollment has been dominated by sicker-than-average customers.

Centene saw revenue increase 10% to $12 billion thanks to enrollment gains on the exchanges. It now covers 1.1 million marketplace members and is poised to add more when it enters three additional exchange markets in 2018 and expands in six existing markets. Centene's net income totaled $254 million, up from $170 million during the same quarter in 2016.

Anthem, however, continues to lose money from its ACA business and plans to exit exchanges in three states next year.

Even so, Medicaid and Medicare membership growth helped boost the company's revenue in the quarter to $22.4 billion, up 4.4% over the year-ago period, while its profit rose 9.6% to $855.3 million.

An​ edited​ version​ of​ this​ story​ can​ also​ be​ found​ in​ Modern​ Healthcare's​ July​ 31​ print​ edition.